Monday, August 4, 2008

Business Structures and Entities

Having help bring an independent film production company to a sort of financial equilibrium (which is a jumping point to something greater), I decided to also formalize my other passion - music - into a full-fledged music publishing company. When I'm not pontificating about the current affairs of our proud nation-state, okay, republic, I will share some simple-language anecdotes about forming a humble American business (two in my case) in the midst of a sluggish U.S. economy. Bear in mind that these anecdotes, quips, and quotes are not meant to be legal advice, financial advice, medical advice, or any sort of professional advice that you would get from a qualified professional. My journey into business is meant for entertainment purposes only, and if you learn something in the process - don't blame me!

Where do I begin? Well, let's start with the companies I co-own and manage: Mutiny Universe (also referred to as my "film company") is a corporation. DeRamos Media (also referred to as the "music company") is organized as an LLC.

One of the basics I learned in my journey was to know some of the various business entities available to me. Doing so is as easy as reading the first chapter of any decent college textbook about business, management, or accounting. However, when it came to forming my music company, I chose to go beyond that and buy a well-reviewed self-help book. Buying a book - whether by Nolo or For Dummies - actually tied together a lot of the hearsay and orphaned knowledge gained while forming my film company years earlier.

Without going into detail about trusts and non-profits and other entity permutations, here are some basic entities I considered in forming the music company:

Sole proprietorship. I could've done this pretty easily. It is just a county-wide fictitious business name statement and a city-wide business license away. However, the structure doesn't provide liability protection. Individuals who run businesses in industries dependent on intellectual property might want this sort of protection. Besides, sole proprietorships are tied to its singular owner - that's why they call it "soul proprietorship"! ha! - and last as long as its owner in the mortal realm. However, like my film company, I essentially wanted the music company to live forever.

Partnership. My brother and I have essentially a partnership in our band The Society of Gloves. This would have been a natural fit for the music company, but this structure lacks liability protection. Of course, getting insurance would give an unprotected business entity some level of protection. Partnerships last as long as the partners remain partners, so this structure wasn't for us.

S-Corporation. My film company was originally structured this way. It is a very formal system and a very simple structure to follow. However, it also limits who can own an S-Corporation (American citizens and permanent residents can; foreigners and business entities cannot) and how many (the number varies by state). It is basically simplicity over flexibility, and wouldn't work for the music company.

Limited Liability Company. This is possibly the most flexible form of business entity: Single-member LLCs are taxed like sole proprietorships; multi-member LLCs are essentially partnerships; LLCs can be treated like corporations if they want. LLCs have flexibility that can sometimes balloon into over-complexity. With that said, we chose the music company to be an LLC. Thus, DeRamos Group LLC was conceived (but not yet born at the time!). (Wait, isn't the music company named DeRamos Media? Well, we'll get into us filing fictitious business names sometime soon.)

C-Corporation. This is the structure for the uber-successful - so successful and savvy that they can endure double taxation (or dance around it!) and still roll in the dough! I think an S-Corp that wants to break free from its limitations should "graduate" to C-corp status when it is financially responsible to do so. At least, that's my two cents when it comes to my film company.

That's the beginning, of sorts, to my story. If you're going to start a business, please do your homework when it comes to choosing which structure is right for your business entity - and there are more ways to structure a business than the above list!

Remember, the preceding was not legal, financial, business, or professional advice!

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